A blog designed to provide an outlet for Jeff's and other unvarnished opinions on community financial institutions. Sometimes serious, other times not, Jeff's opinions are his own and may not represent the opinions of his esteemed employer.

Sunday, April 11, 2010

Does banking have too many balance sheet managers?

When you are the CEO of a very large financial institution, managing the balance sheet of the bank probably occupies a very large amount of your time. You may be four to seven levels from customer contact personnel, except for possibly the very large customers.

But if you are the CEO of a community bank, thrift, or credit union, one would think to spend much more time with customers, brainstorming with your senior management team on how to get more customers, or making calls on customers. Based on my experiences with community bank executives, this is generally true: Smaller bank CEO’s spend more time with customers than larger ones.

I have found there are two types of managers within community banks: customer managers, and balance sheet managers. Customer managers typically rise to the top through customer-contact lines of business, such as commercial lending or trust. Balance sheet managers typically climb the corporate ladder through operational areas, such as finance or operations. A CEO, in my opinion, needs to have both skills. A community bank CEO should probably focus more on customer management, without ignoring balance sheet management (see illustration).

I am not so sure many share my opinion. When I participate in strategic planning sessions, we spend a lot of time discussing balance sheet management issues. We give lip service to the customer aspect, and then move on to such issues as, “we have $50 million in CDs coming due in the next three months and have to develop a strategy to replace that funding.” News flash: If you don’t create a long-term strategy on how to acquire or deepen relationships with customers that tend to bring deposits, you will remain in the less-than-virtuous cycle of creating the next rate promotion to keep and grow funding.

This attitude perpetuates itself in the personnel complement of the bank. I was recently in a strategic planning retreat where the CEO said that only five percent of his workforce has responsibilities for relationship management and business development. The other 95% were operations personnel and balance sheet managers. I understand that operations personnel occasionally take care of customers, but I would not characterize customer relationships as their primary responsibility. The quote below by management guru Ken Blanchard is truer in banking than, say, in Wal-Mart:

"Profit is the applause you get for taking care of your customers and creating a motivating environment for your people." – Ken Blanchard

Balance sheet management is very important to manage many types of risks inherent in banking. A good example is a client that hired a former construction foreman that eventually became their top producing lender. Not surprisingly, the bank became overweight in construction lending and is experiencing difficulties in today’s economy. So I am not suggesting ignoring balance sheet management. But your strategy has to identify the types of customers you want to serve better than competitors, and structure your bank, including your personnel, to pursue those customers passionately.

While doing so, you must recognize and hedge against risk. Perhaps look to customer segments that are counter-cyclical in terms of when they flounder in economic downturns. Or perhaps you can use participations, the investment portfolio, or some other means to hedge against exposure to one industry segment. Another strategy would be to get top-notch personnel that specialize in different industry groups. Whatever the strategy, I think you should consider that customer management should be front and center. Focusing on balance sheet management could be the proverbial tail wagging the dog.

2 comments:

Jeff you make some very good points. The difficulty in all of this is that all the areas you highlight must be managed. I think the better performing community banks do not rely on the CEO or the Senior Management Team to manage all of this but rather a group of stake holders from various areas of the bank.

As a Marketer with over 20 years experience I have always analyzed the "balance sheet" making sure value was added and waste eliminated at the same time making sure the customer (vis-à-vis the optimum segments) was served. As a work force it is our job to not just show up but to understand how the business works that we work for. It is not easy.

David,I agree it is not easy. I wish there was more balance in number of staff with relathionship management/business development responsibilities and those with operational and balance sheet management responsibilities. Imagine if we added all of the minutes all employees worked in the bank, and segmented them between customer / prospect contact and "other", which do you suppose would win out? Jeff

About Me

Jeff started his banking career in the IT Department of a northeast regional bank in 1985. His banking experience includes IT, Trust, branch management, and merger integration. He has served as a consultant to the banking industry since 1997, specializing in strategy development, M&A, and profitability. He interrupted his banking career to serve in the U.S. Navy, the best Navy in the world, where he specialized in intelligence gathering against very bad people. He lives in Lancaster County, Pennsylvania with his wife and two children.